ExpertHard1 markMultiple Choice
CPA · Question 50 · Area I: Financial Reporting
Horizon Corp. has the following information for calculating its debt-to-equity ratio:<br/>- Current liabilities: $400,000<br/>- Long-term debt: $1,200,000<br/>- Common stock: $800,000<br/>- Retained earnings: $600,000<br/>- Accumulated other comprehensive income: $50,000<br/><br/>What is Horizon's debt-to-equity ratio?
Horizon Corp. has the following information for calculating its debt-to-equity ratio:<br/>- Current liabilities: $400,000<br/>- Long-term debt: $1,200,000<br/>- Common stock: $800,000<br/>- Retained earnings: $600,000<br/>- Accumulated other comprehensive income: $50,000<br/><br/>What is Horizon's debt-to-equity ratio?
Answer options:
A.
1.10
B.
1.14
C.
1.50
D.
0.91
How to approach this question
Calculate debt-to-equity ratio as total debt (current liabilities + long-term debt) divided by total stockholders' equity (all equity components including AOCI).
Full Answer
A.1.10✓ Correct
The debt-to-equity ratio measures financial leverage by comparing total debt to total equity. Total debt = $400,000 + $1,200,000 = $1,600,000. Total equity = $800,000 + $600,000 + $50,000 = $1,450,000. Ratio = $1,600,000 ÷ $1,450,000 = 1.10. This indicates $1.10 of debt for every $1.00 of equity.
Common mistakes
Using only long-term debt instead of total debt, omitting AOCI from equity, inverting the ratio, or calculation errors
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